Currently, Tether, which is supposed to be a coin pegged to the dollar, is trading for just 97 cents. Bitfinex, whose CEOs are intertwined with Tether's operations, has decoupled from the other markets. Given that there are billions of Tethers outstanding, many believe that Tether's collapse would be catastrophic to the cryptocurrency industry. They're right, because that would be exactly the sort of panic that is needed to take bitcoins down to the further capitulation that I've been talking about.
I think that it's important, however, to differentiate what is likely to happen to exchanges in a similar situation to Bitfinex and Tether, and what happened to exchanges like Mt. Gox and Cryptsy. In the latter two cases, money was actually stolen from the exchanges, and those exchanges illegally continued to operate while they were insolvent. In the current situation, the exchanges that will fail are likely to be able to fully account for all assets.
However, as I've been repeatedly mentioning, there is a paradoxical effect taking place right now where banks are becoming much more strict in closing accounts of completely legal cryptocurrency businesses, despite a smaller percentage of cryptocurrency than ever before being used for illegal activities. It no longer matters whether a company actually has dollars. It only matters whether those dollars can be accessed by the company.
Every time banks have decided to close our accounts, the procedure is always the same. They say that deposits to the accounts will be rejected beginning immediately, but the account can continue to be used to send money out for a month or so. If Bitfinex has had its banks close its accounts, then what is happening right now is exactly what we should expect to see. The banks, without warning, would have notified Bitfinex that they were closing their accounts and were prohibiting deposits immediately. That would force them to set the site to stop accepting wire transfers. Withdrawals, on the other hand, would not yet be suspended, so the exchange can continue sending money to customers who want to receive money. Slowdowns in withdrawals, though reported as suspicious, could simply be due to the high volume of wires requested by panicked customers.
This bank account closure process we've experienced sets a deadline until access to the account is blocked and the money must be removed. Since humans like round numbers, in our case the deadlines given have usually been one month from now or at the end of the next month.
Given this experience, if I had to guess what is most likely to happen in a hypothetical situation where an exchange has lost banking services, it is that the exchange will end up sitting on a cashier's check for billions of dollars. The deadline will pass, they will not be able to obtain a new bank account, and the bank will mail them a check. Coins associated with the exchange would crash when dollar withdrawals are halted, bringing the cryptocurrency markets down with it, starting the next downward phase of this bubble cycle. Eventually, the exchange will either obtain a bank account or will declare bankruptcy, because it can't spend any of its money to continue operations. If bankruptcy occurs, then customers might end up losing money solely because the lawyers involved in the process would take fees from the previously fully backed assets. The bankruptcy attorney will probably have an easier time of getting a bank to cash the check to pay former customers.
I'm confident that the banking environment has now become so difficult that we will likely see at least one major exchange go out of business solely because it cannot obtain a bank account. The inability to obtain a bank account will not be indicative of any wrongdoing by the company, so it isn't possible to predict which exchange it will be by looking at how trustworthy it seems to be. And the truth is that I wouldn't be able to say that the panic and price crashes that will ensue from this exchange failure will be unwarranted - the inability to obtain bank accounts is significantly holding back the industry right now. This is a ticking time bomb - one that would cause me to hedge my bets in a more stable currency if I had a bank account.
What's ironic about all of it is that if that happens, the industry will have regressed since the bottom of the last bubble. Last time, customers lost because the bad guys took their money. Customers will have lost this time because the good guys tied up honest people's money in the banking and legal system, despite the CEOs having done nothing wrong.
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